EIU Global Forecasting Service

Global oil prices look set to hover around US$55/b-US$65/b in 2018

January 18th 2018

Global oil demand is also picking up, on the back of stronger than expected economic performance in the US, the euro zone and China. We estimate that global oil consumption grew by 1.6% in 2017, helping to ease the oil market into a small deficit of an estimated 60,000 b/d. We now expect global demand to edge up slightly in 2018, to 1.7% (1.6% previously), owing to higher forecast consumption growth in China. We have revised up our forecast for China's real GDP growth in 2018, to 6.4% (5.8% previously), as the government now appears to be taking a more gradual approach to reducing private-sector debt levels, avoiding a sharp slowdown in 2018. As a result, we now expect the global market surplus to be fairly minor this year, at 40,000 barrels b/d (90,000 b/d previously), which will lend support to prices. We then forecast the global market surplus to rise to 170,000 b/d in 2019, as a number of countries boost production following the end of the OPEC deal.

Although fundamentals point to a gradual rebalancing of the global oil market, geopolitical tensions will also play an important role. The arrest of 11 Saudi princes and other key officials in November 2017, as part of an ongoing anti-corruption campaign led by the powerful Saudi crown prince, Mohammed bin Salman al‑Saud, raised concerns about tensions within the Saudi royal family, pushing oil prices up to a two-year high of US$64/b. In reality, the move by Mohammed bin Salman to consolidate power around himself is likely to strengthen the kingdom's bid to restrain oil supply and move ahead with the partial initial public offering (IPO) of Saudi Aramco, which was already part of our core forecast. We do not expect the crown prince to face any serious political challenges in the medium term, in part given his domestic popularity, particularly with young people. However, potential domestic social tensions will remain a concern for oil investors, as will the intensifying rivalry between Saudi Arabia and Iran—which is also grappling with social tensions, evidenced by a wave of protest in early 2018.

We forecast Brent prices to average US$63/b in 2018 (US$59/b previously), as the OPEC deal is unwound only gradually and geopolitical tensions keep prices elevated. With currently frozen production capacity returning to market in 2019, we expect prices to moderate slightly, to US$60/b, before edging down to US$57.8/b in 2020 as the US enters a mild technical recession. As global stocks tighten and US demand recovers, we expect prices to recover to US$63.3/b by 2022—an eight-year high, but still far from the levels seen during the commodities boom of the past decade.

Hard commodities: The upward revision to our Chinese GDP forecast will also have an impact on industrial commodity markets, especially for base metals. Although industrial raw materials (IRM) prices remain volatile, the prices of all six base metals that we track on the London Metal Exchange (LME) rose in 2017, the first such co-ordinated increase since 2011. This growth was driven by recovering demand across emerging markets—including in China and India—and further supported by higher global oil prices compared with 2016. We expect IRM prices to expand again, by 4.2% (4% previously) in 2018, on the back of faster than expected Chinese demand and stricter environmental inspections there, which will causing occasional supply tightness. In 2019 we expect IRM prices to contract slightly, by 0.3% (1% previously), as demand growth for metals moderates following two years of particularly strong growth.

Soft commodities: We expect food and beverage prices to be relatively sluggish over the forecast period, reflecting subdued demand (in historical terms) and record-high inventories following a few bumper harvests, particularly for grains, in the 2016/17 season. Although the risk of a La Niña weather event is increasing, conditions appear likely to be fairly moderate, and we do not forecast an agricultural price shock. We expect the food, feedstuffs and beverages (FFB) price index to remain flat in 2018, following six consecutive years of decline. We then expect agricultural commodity prices to rise by 2.7% on average in 2019 as global supplies begin to tighten modestly, although prices remain below the historical average. Overall, we expect rising population and incomes, along with rapid urbanisation and changing diets, to support continued modest growth in FFB prices over the forecast period.